A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Place for US cash? Many people say healthcare, because it's defensive, especially going into a recession. He sees better value in tech, as it's down 35%. NASDAQ may not be the best to own for the next 3 years. But over the next 50 years, this is the best thing to own, especially after the downdraft it's had.
COMMENT
Rally in November-December? It's really cute to call a rally here. We're in it right now, though we're having a tough tape today. If there are more up days in the market, people will be teased back in. We still haven't had the full reckoning in the market. We'll probably bottom Q1 or Q2. But we're at levels right now where it's very interesting to be picking away.
COMMENT
Change tactics from last decade? Over the last decade, main thing was being long tech and e-commerce plays. You just had to buy those companies and sit on them, and those companies did well. In 2021, those stocks were trading at crazy valuations. Now you want to be a stock picker, and not just buy the general market.
COMMENT
We're in for several quarters of choppiness? For sure. Especially the US indexes, which are dominated by the tech sector. Canada's a bit different. The tech area's under a bit of pressure, and we're going into a period of economic weakness. Tech does have some industrial aspects to it in terms of cyclicality. Starting to hear rumblings about weakness in AAPL and other enterprise software companies. People have been valuing these companies like they never, ever have troubles, and it's ominous for those sectors.
COMMENT
Changing of the guard in tech. For years, AAPL's largely just been focused on enhancing their current position. Has a very good ecosystem. He's been following the industry for 30 years. 30 years ago there were companies that people thought were embedded, and then something came along to upset the apple cart. Today's leader becomes tomorrow's laggard. The PC was the place to be in the 90s. Now handsets are the place to be, and that area's being generally dominated by one company. Within that area, it was Nokia for a while, then it was BlackBerry, and now it's AAPL. Even though AAPL has a slightly stronger embedded position, eventually somebody will trump that. Will it happen in the next 2 years, or not for another 20? As an investor, you have to be watching these things closely.
COMMENT
Some say buy cyclicals when multiple has soared and profit has collapsed. Generally true, but things have gotten so wacky. Canada has 3 world-class lumber companies: IFP, CFP, and WFG. At the bottom of the cycle, they'd be at-worst break even. So he'd argue they should be trading at higher multiples than what they're at.
COMMENT
Retail in a recession. If you look at companies like ATD and PKI, the biggest part of their business is selling chocolate bars and coffee. Selling fuel is just a way to bring customers in. When the economy is weak, retail is generally under a bit of pressure. But this is a much more stable area than, let's say, a clothing retailer. In a recession, sales and profits will not go down as much as in other sectors.
COMMENT
E-commerce malaise. Most of the e-commerce pure plays are not making money. AMZN is the exception. In last year's environment, Wall Street would just throw money at them whenever they wanted. But now, you can only finance if you make money. These stocks are in the penalty box, and will continue to be there for a while.
COMMENT
Effect of US mid-term elections. Politics always has some effect. Whenever the 3 areas are controlled by 1 party, scary things can happen. It's good to have a balance, and business generally likes stability of policy. Good chance that the Republicans will get power in the Senate or House after the mid-terms, and that would be a good outcome. So that's something to watch.
COMMENT
Marijuana sector. He's studied the marijuana companies. He just doesn't see how you make sufficient profit to support the valuation. Especially, 2-3 years ago, the valuations were phenomenally high. In Canada, 99% of the companies consistently lost money. Now in a cycle of consolidation to reduce the competition and achieve critical mass. The area now looks interesting, but he doesn't own anything in the sector. Seems to be more profit in the US. Trend to legalization in the US continues, but it's still not official, an ongoing project. Valuations in US have dropped, and he's watching, but too soon to step in.
DON'T BUY
Convertible debentures. It's a debt secured by an individual company. It's halfway between an equity and a full-fledged bond. You have more security in a debt instrument than you do in an equity, but convertibles are secondary to bonds. So if the company goes bust, bond holders get paid before holders of convertibles. You have to look at each individual security in the company. He does almost exclusively equities. He looks to make 10-20% per year for clients, and debt instruments won't give you that. You have to do the same analysis on a company for debentures as you would for equities. Either way, you want a company with growing profits over time, and you'd be better off owing the equity.
COMMENT
Oil & gas. Agrees that a lot of big portfolio managers are out of oil and gas. But people need to realize that oil and gas are going to be with us for a very long time. Wind, solar, geothermal, and hydro are going to increase as part of the power grid, but this will take some time, 50-100 years. Can't be done overnight. It takes a lot of energy to live our North American lifestyles, so unless we want to go back to living in caves, these companies will be around for a long time and they shouldn't be discounted to the extent they are.
COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The Crushing Power of Interest Rates. Central Banks largely have one tool that they can use to curb excess demand, and therefore inflation, which is interest rates. Increasing interest rates cause economic demand to slow and decreasing interest rates are used to stimulate the economy. The Federal Reserve has historically raised interest rates when the labour market is strong and decreased interest rates when it is weak. As we know from this market update so far, the labour market is quite strong, which is why the Fed is comfortable with increasing rates, particularly at such a rapid pace. While many, including the Fed, are quite worried that a stubbornly tight labour market may keep inflation high for years, what we know from recent history is that rising interest rates have demonstrated their ability to dismantle a strong labour market. Unlock Premium - Try 5i Free
COMMENT
The markets are very oversold, so this rally was set up going into earnings season. Earnings (like JNJ) have beat and are not as bad as expected, even with downward revisions. Positive, but until the Fed stops or pauses raising rates, the market will be in a trading range. Cash levels are high, so money managers are starting to deploy that. Recession forecast: hard to forecast, but more economists are expected one in 2023. The financial system and consumers remain healthy, and employment across North America is pretty strong. If there is a recession, it will probably be a soft, not deep, one.
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